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German decision may have major ramifications for Ireland

Mon, Feb 14, 2011, 00:00

A pending decision of the German constitutional court could have implications for the EU bailout for Ireland, writes ROSLYN FULLER

ACCORDING TO the EU-IMF memorandum of understanding, Ireland is set to receive €22.5 billion from the International Monetary Fund; €4.8 billion in bilateral loans from the United Kingdom, Sweden and Denmark; and a massive €40.2 billion from the newly minted European Financial Stability Mechanism and European Financial Stability Facility.

The trouble for the Irish Government, or anyone else looking for a quick financial fix, is that the single biggest financier of the EFSM and EFSF bailout mechanisms is the usual suspect – Germany. And so annoyed are some Germans at having to tap their Wirtschaftswunder(economic miracle) of industrialisation to bail peripheral EU comrades, that they have taken the matter before the German constitutional court in a case generally known as Guarantee for Loans to Greece.

This is not to be taken lightly, as the court enjoys an extremely powerful position within the German constitutional system. Should it decide that Germany’s contributions to the EFSM and EFSF are unconstitutional, both of these mechanisms could evaporate faster than a stock option at Lehmann Brothers.

This is not the first decision the constitutional court will render on the question of European integration – its jurisprudence on this issue is extensive and has been largely pro-integration. Never before, however, has a contentious issue touched the coveted national wallet so deeply. So, for Ireland, the €40 billion question is: do the complainants have a case?

The short answer is probably not.

The complainants base their case on several points. Firstly, they claim that the European stability mechanisms contravene article 125, paragraph 1 of the Treaty on the Functioning of the European Union, which states that the union is not liable for the financial commitments of member state governments, and that member states are not liable for the commitments of other member states. By contributing to the bailout packages, so the argument goes, Germany is taking on liability for the commitments of other member states.

This interpretation is, however, based on a false understanding of what is meant by the term “liable”. The purpose of article 125 was to make clear that, despite entering into a common currency, states could not be made legally liable by creditors for the financial obligations of other member states. It was important to stress this in order to define the limits of the common financial policy within the euro zone.

However, article 125 is not applicable in the present case, because the guarantee package does not affect Germany’s legal liability. Creditors of other member states, such as Greece and Ireland, cannot hold Germany responsible for those debts. Instead, Germany is freely offering Greece and Ireland aid in the form of loan guarantees, an action it is permitted to take vis-a-vis any state in the world. The complainants, however, have other strings to their bow, and are also relying on the German constitution’s robust protection of individual rights, in particular, articles 38 (1) and 14 (1).

Article 38 (1) states in part that parliamentarians are not bound to any directions or orders, but only obligated to follow their own conscience. The argument here is that the amounts of money involved are so incalculable that the parliament is essentially binding future parliaments to certain budgetary constraints, thus emptying this article of any content. While this argument has something going for it, it also entails an obvious counter-argument, namely that all parliamentary decisions have ramifications for future parliamentary decisions.

Article 14 of the German constitution protects property. The complainants’ argument here is that a separate part of the recovery plan – purchasing the bonds of nations in crisis via the European Central Bank – will undermine the stability of the euro, allegedly injuring the complainants in their right to property and contravening article 88 of the constitution, which states that the ECB is obligated to maintain price stability.

However, arguments concerning price stability have failed in the past. In the present case, it is likely the court will decide that whether or not the euro will be undermined via the ECB’s bond purchases does not lie within its jurisdiction, because the court may only decide on the constitutionality of laws, and not generally on their efficacy.

The German government has decided to give the loan guarantees precisely in an attempt to maintain price stability. Only if the complainants are able to make an overwhelming case for their point of view is the court likely to consider seriously the efficacy of the government’s measures.

Due to the apparent weakness of the case, overwhelming legal opinion in Germany is that it is destined to fail. The only other possibility is a severe worsening of the financial situation to the point where it becomes extremely obvious the stability mechanisms cannot succeed. The court’s initial decision on the temporary injunction occurred in regards to Greece. Since then Ireland has come in for a bailout; it looks likely this will be followed by Portugal and possibly Spain.

Even in that event, it is unlikely that the court will decide the complainants’ rights protect them from bad governmental decisions (if they were to do so it would be a watershed moment in German jurisprudence) and equally unlikely European politicians will completely abandon the euro project for which they have shed so much blood, sweat and tears over decades. They may choose instead to temporarily suspend certain states from the currency or begin a major crackdown on financial speculation.

In any event, the court will be aware of the ramifications of its decision. Any impact on German legal scholarship pales in comparison to that it will have on Ireland’s economic future.

Dr Roslyn Fuller studied law at the Georg-August-Universität in Göttingen, specialising in public international law. After working at the Institute of Public International Law and European Law she moved to Ireland. She completed a PhD at Trinity College last November.